Break-up the single currency would lead to a 7% loss of output across eurozone next year, Fathom Consulting predicts. Photograph Michael Probst/AP

A break-up of the eurozone would see the UK economy contract by more than 5% in a slump that would surpass the downturn of 2009 in its severity, a City forecasting firm has warned.

Fathom Consulting said the demise of the single currency would trigger a depression that would result in plunging output and falling prices across the entire global economy.

Fathom said its central case assumed that Europe's policymakers would take the necessary, if expensive, steps to keep monetary union together. "But failure to save the euro will result in even greater costs, for everyone; not least for the UK." Even if the euro survives intact, Fathom expects the UK economy to contract this year and grow slowly in 2013 as it apes the sluggish performance of the Japanese economy after its financial crisis at the end of the 1980s. But it estimates that a full-blown euro break-up would result in a 5.2% drop in output next year, worse than the 4% decline in 2009.

Erik Britton, director at Fathom Consulting said: "There is no recovery in the UK. It's not down to the euro; it's not down to austerity. More creative policy measures are now essential. The (Bank of England's) Funding for Lending scheme is a start, but it's not enough. The painful but necessary solution is to write off the bad debts in the housing sector. Without that, we are doomed to repeat the experience of Japan: two decades of lost growth and counting."

Fathom said the fragmentation of the single currency would lead to a 7% loss of output across the eurozone next year, with the weak countries on the periphery of monetary union seeing a decline in GDP of more than 11%. Faced with this worst-case scenario, Fathom would expect the Bank of England to increase its credit creation through quantitative easing from £375bn to £1tn.